Last week Federal Reserve Governor Christopher J. Waller wrote: Reflections on Monetary Policy in 2021, where he discussed whether or not the Fed fell behind the curve. In Fedspeak, the Fed did not raise rates fast enough to “fight inflation.”
With April’s producer price index announcement of 11%, it’s likely someone at the Fed thought it best to give the public an explanation. The Governor begins by preparing listeners for the excuses to follow:
First, the Fed was not alone in underestimating the strength of inflation that revealed itself in late 2021.
Then he explains that policy errors might not actually be policy errors:
…setting policy in real time can create what appear to be policy errors after the fact due to data revisions.
When referring to the dual mandate of maximum employment and price stability, he notes that:
Whether you believe this is the appropriate mandate or not, it is the law of the land, and it is our job to pursue both objectives.
Unfortunately, history is rife with instances where regular people were just doing their jobs, leading to countless atrocities.
Not only is the Governor just doing his job, but he doesn’t act alone. In a nation of over 300 million people, he explains:
…policy is set by a large committee of up to 12 voting members and a total of 19 participants in our discussions.
As per recent decisions made by the committee, on December 2020:
We said that we would “aim to achieve inflation moderately above 2 percent for some time”…
Meaning, the Fed wanted to increase the rate at which our currency debases year over year.
It’s also alarming when those in charge, whose job it is to make predictions about the future, always seem so wildly inaccurate. In the case of the 19 participants who weigh in on the fate of the US dollar:
With regard to future inflation, 13 participants projected inflation in 2022 would be at or below our 2 percent target. In the March 2021 SEP, no Committee member expected inflation to be over 3 percent for 2021.
This gets excused by claiming the Fed’s forecast was “consistent with private-sector economic forecasts.”
He concludes with questioning whether the central bank fell behind the curve and if they should have hiked rates sooner. However:
Even though we did not actually move the policy rate in 2021, we used forward guidance to start raising market rates…
Since the 2-year Treasury yield went from 25 basis points in September to 75 basis points by December 2021, then:
That is the equivalent, in my mind, of two 25 basis point policy rate hikes for impacting the financial markets.
Concluding:
That is the equivalent, in my mind, of two 25 basis point policy rate hikes for impacting the financial markets. When looked at this way, how far behind the curve could we have possibly been if, using forward guidance, one views rate hikes effectively beginning in September 2021?
One must wonder what exactly the 19 Federal Reserve participants do for a living. If rates can rise without the Fed, and if the private sector can forecast without the Fed, then the necessity of having the Fed should be questioned. Yet, according to the Governor, it really doesn’t matter what anyone thinks, or how detrimental the outcomes of the Fed become, as explained: “it is the law of the land,” and he’s just doing his job.
